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Wednesday, November 29, 2017

How to Stimulate Economic Growth

Yesterday we noted
that fiddling with the tax system does not really affect the aggregate rate of
economic growth.Assuming that the
government is not emitting bills of credit and inflating the currency and that
private opportunists also are not printing their own money, the amount of
spending in the economy will remain the same, regardless of the tax rate, even
if the tax rate is 100%.

Why?Because consumer demand is what drives the
economy.If there is $1 million earned
in an economy in a year, and the government taxes and spends $100,000, and the
citizens spend the rest, how much spending has there been in that economy in
that year?$1 million.If the government taxes $250,000 and the
citizens spend the rest, how much spending has there been?$1 million.

Do you see where this
is going?Or should we take it to its reductio ad absurdum: $1 million earned,
the government taxes $1 million . . . how much is spent?$1 million . . . probably primarily in
welfare to take care of all the people whose income got taxed away. . . .

So, consistent with
the analysis in Dr. Harold G. Moulton’s 1935 classic The
Formation of Capitaland its refutation of the Keynesian New Deal, consumer
demand drives the economy.It must,
however, be direct demand that derives from production in which the consumer
has a private property stake, not simply the power a government might have to
palm debt-backed currency off on the economy.

There was a problem
with Moulton’s analysis, however.He was
spot on about money and credit, the role of supply and demand, the need for
consumers to produce and for producers to consume . . . but he left out
widespread ownership of capital as the chief means to gain consumption income
in an economy in which technology is advancing, displacing labor from
production.

Moulton admitted this
was a problem, but he didn’t know how to solve it.In Income
and Economic Progress, he cautiously suggested a few things, such as profit
sharing, that mimic ownership, but for some reason assumed that widespread
ownership required redistribution of existing capital, already owned by others,
which he could not condone.

No, as Louis Kelso and
Mortimer Adler explained in their two collaborations, The Capitalist Manifesto (1958) and The New Capitalists (1961), it is not only possible to finance broadly
owned new capital — not redistributed
old capital — in the manner Moulton described in The Formation of Capital, it is essential, for two very good
reason:

·One, as technology advances, everybody must
become a capital owner for the simple reason that Say’s Law of Markets requires
that all producers be consumers, and all consumers producers in order to
function.With technology taking over
the bulk of production, the only way to be sufficiently productive in the future
will be to own the technology that is doing the producing.

·Two, as Moulton acknowledged, new money that is
created must be backed by privately owned existing or future wealth.If Say’s Law is to function, the government
must not issue one cent of new money backed with its own debt, or it has
interfered with private property and the sanctity of contract.

The problem becomes
how this can be done.Instead of looking
at all the failed alternatives, though, we’ll cut to the chase and just let you
in on the secret.

"See? Dead easy!"

It is possible for
every child, woman, and man in the United States (okay, in the entire world) to
become a capital owner without taking ownership of anything away from anybody
else.Ironically, Moulton himself showed
how this could be done: by turning the future savings into money now to finance
new capital formation to be broadly owned.This is what commercial and central banks were invented to do.

The process is simple
in essence.Someone with a capital
project proposal that is judged viable has something of value: a profitable
idea.The “borrower” can draw up a
contract called a “bill of exchange” promising to redeem the bill for, say,
$100,000, when the capital project is formed and becomes productive.

The borrower takes the
bill to a commercial bank, and the bank “purchases” (accepts) the note at a
discount by issuing a promissory note at less than the face value of the bill,
to be repaid at the full face value of the bill at some future date or
occurrence.The bank’s promissory note is
used to create a new demand deposit for the borrower, who takes the money and
purchases what is needed to finance the new capital.

Well . . . sort of.

When the project
becomes profitable, the borrower redeems his bill by paying off the promissory
note, cancelling the money, thereby preventing inflation.The bank’s revenue, which has to be enough to
cover its expenses, risk premium, and a fair profit, consists of the difference
between what the borrower received from the bank, and the amount repaid.

Now, about that “risk
premium.”All commercial loans are considered
risky.The risk premium is a
determination (okay, an educated guess) as to the chances of that loan not
being paid back.If the bank guesses
correctly and makes enough loans, everything evens out.

Even so, all loans
must be collateralized in some way.Just
because statistically some loans go bad doesn’t mean it’s right for a
particular borrower to default on repayment.

The problem is that
traditionally all collateral consists of existing wealth . . . which is by
definition a virtual monopoly of the already wealthy.Kelso, however, had a solution.If collateral ensures the lender against
default, why not use “real” insurance, and use the risk premium as an actual
insurance premium instead of a rather tenuous form of self-insurance?

The policy would pay
off in the event of a default, making the arrangement not only less risky than
traditional collateral (banks want their money back, not some collateral they
have to dispose of at a fraction of its value), but open to use by the
non-wealthy.After all, it is much
easier to pay a small risk premium than to accumulate the wealth for
traditional collateral.